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Little known ways to reduce capital gains tax on your investment property

Oct 02, 2013

Renting out your property can be a great way to earn some extra income, but there are tax implications that it's important to be aware of before you put your home on the market. The most significant of these is the capital gains tax, or CGT, that you must pay upon the eventual sale of your investment property. However, by taking a closer look at how the CGT is calculated, you may find an exemption that you qualify for. There are certain exemptions allowed by the Australian Taxation Office, including those who rent out their primary residence.

How CGT Is Determined

To calculate the capital gains tax, it's first necessary to determine whether or not you have made a capital gain. This is the difference between the sale amount of a property and its original cost base. One thing that's important to remember is that cost base not only includes the price you paid for your property, but also any associated fees including legal costs or stamp duty. It's also possible to sell your asset at a capital loss, if this number is lower than the original base amount. Tax is determined by adding your capital gain or loss to the amount of taxable income you have received from your property. This profit will then be taxed at the marginal tax rate. If the property has been owned for longer than one year, then only 50% of the capital gain is added to taxable income.

Full Exemptions

There are numerous exceptions to the capital gains tax which are important to understand. For example, your main place of residence is exempt from CGT. To qualify for this exemption, the property must have served as your primary dwelling from the time of purchase. For example, if you bought a property to rent out but then ended up living in it several years later, it wouldn't qualify. However, if you originally purchased the property to use as your residence but then moved out later and rented it out, it may still qualify for the exemption. Provided that you rented it out for less than six years, it would qualify for an exemption. Yet be aware that if you are claiming an exemption for this primary home, you cannot then claim it on a secondary home even if it is the one you are currently living in. The second property would still be subject to capital gains tax.

Partial Exemptions

Partial exemptions can also apply, particularly if you have acquired multiple investment properties over a period of time. In the case above where you rented out what was originally a primary residence for more than six years, the ATO would only tax you for the time period after the six years has passed. You would also receive a 50% discount on the CGT if you owned the property for longer than one year, making it a partial exemption or discount.

If you've spotted a prime investment opportunity in Tasmania up on Homesales or are thinking about renting out your primary residence while you go away for an extended holiday, you'll need to think about ways to reduce your capital gains tax. By planning in advance, you can maximise your investments and avoid being hit with a surprise tax bill in the future.

Tags: CGTChartered AccountantPersonal taxProperty

Author: Rachel MacDonald

Comments

"great article Rachel. I recently moved in with my partner in June 13 after buying a house together in Jan 13 (50/50). We only became defacto in June 13. I therefore put my own house on the market in May 13 and it just sold in October 13. Since I moved in with my partner in Jun 13 and the fact that I had lived in my property for over 12 months, not rented it out and has just been sitting for sale empty, would I be exempt from CGT on the sale of my home given (under the 6mth transition rule) from June 13 to Dec 13? Your help is appreciated. "

By: Tess on Oct 11, 2013 4:04AM

"Awesome post Rachael!"

By: MarkHay Rep on Nov 08, 2013 8:26AM

"Hi my wife and I are currently looking to buy a farm. We owned 3 investment properties in the NT and are currently renting in QLD. We have sold 2 of the properties for a profit of $ around $120,000 and the 3rd property would have a Profit of $350,000 we are worried about selling it in the same year as the other 2 because of capital gains. Is there any ways of gating around this by reducing /deferring it somehow. I have been told if we reinvest it within 18 month we don't have to pay CGT is this true. I bought the 3rd property 12yrs ago with a first home buyers grant and lived there for 18 months. Can you please give us some advice. Thanks"

By: Greg Baker on Dec 20, 2013 1:57AM

"Hi There, we purchased an investment property 6 months ago and are now looking to sell it with a net profit(after agent fee and leagl cost) of $35000.can we reduce our CGT because I have not worked at all in the previous FY as we had a baby? Does that get taken into consideration? I am back to full time work.Are there any govt bonds or something we can purchase to reduce tax?"

By: Bhumika on Jul 14, 2014 2:14AM

"Hello, my mother and I are selling my childhood home and are wondering about CGT. The situation is this: The home is our only home Australia, my family still lives in it rent free. My mother and I now live in the US. When we sell the house in Sydney, are there any exemptions from CGT?"

By: Nick on Sep 22, 2016 11:43PM

"Hi there, I have an enquiry regarding CGT please. My son purchased a house nearly six years ago (6 years this December 2017) When he purchased he lived in it for 8 months but then he decided he would rent the property out and moved back to live with us at our home. The tenant is moving out in 3 weeks time so my son wants to move back into the property. How long does he have to live back in the property is there a time limit with ATO to avoid CGT? "

By: maree on Jun 15, 2017 11:45PM

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